Survey: Shippers expect business to grow

The average growth rate by which shippers anticipate their businesses to grow has increased, the pricing and employment outlook remains solid, and ongoing rail traffic strength has been aided only in small part by freight pulled forward in anticipation of a West Coast port strike, according to Cowen and Company Managing Director and Railway Age Wall Street Contributing Editor Jason Seidl.

Based on the results of Cowenâ€™s second-quarter 2104 Rail Shipper Survey, â€śThe results affirm our positive view of the rail industry and may be an indicator of overall economic strength,â€ť says Seidl. â€śShippers expect their respective businesses to expand at an average rate of 6.9% over the next 12 months. This is 180 BPS (basis points) better than the 5.1% result recorded in our first-quarter 2014 survey, represents the third consecutive quarterly improvement, and marks the first time since second-quarter 2011 that the index broke 6.0%. All industry segments are expected to grow. In order of magnitude, the outlook for transportation, other traffic, forest products, metals, building products, and petroleum products improved from first-quarter 2014. The outlook for consumer products, chemicals, and agricultural products declined slightly from first-quarter 2014.â€ť

â€śOnly 21% of the shippers surveyed have pulled some freight forward in anticipation of a potential West Coast port strike,â€ť notes Seidl. â€śThis is a positive result for the rail industry, in our opinion, as it affirms our view that the ongoing robust traffic growth has only been aided in small part by freight that has been pulled forward. The response to this question also suggests that most shippers may believe that a strike is unlikely to occur.â€ť

Railroad shippers anticipate an average base rate increase of 3.8% over the next 6-12 months, â€śwhich is a mere 10 BPS shy of the prior quarterâ€™s survey,â€ť says Seidl. â€śThe second-quarter 2104 result effectively suggests that rail pricing continues be solid and that the cumulative 60-BPS improvement seen in second-half 2013 is likely sustainable. While the very slight 10 BPS second-quarter 2104 drop may not have statistical significance, it is also possible that the first quarterâ€™s weather-related service issues, some of which lingered into the second quarter, affected shippersâ€™ responses. As the carriers get closer to fully restoring their networks in the aftermath of one of the harshest winters in recent history, pricing should continue to be supported by solid underlying fundamentals. We favor our â€śOutperformâ€ť-rated Canadian Pacific, Union Pacific, Genesee & Wyoming, and Norfolk Southern going into earnings and note that our â€śMarket-Performâ€ť-rated CN could report strong results on robust traffic growth.â€ť